Market Hazing Tests Endurance of the ‘New Economy’
There are a lot of individual investors today like Linda Tisdale.
The 48-year-old Memphis, Tenn., accountant was a conservative investor for many years until she took a leap of faith in late February and ventured into individual stocks for the first time in her life.
Now, in the wake of the horrendous market plunge, all three of the stocks she bought are down--including a pair of unprofitable biotechnology companies that have shriveled to one-third or less of their former values. Tisdale, understandably, is shellshocked.
“I wanted to try to make a little money because you don’t make money in a savings account,” she said. “It’s a sinking feeling when you look at [the stocks] and they’re just going further and further down.”
Until six weeks ago, millions of investors followed what they thought was the stock market’s golden rule: Be willing to take significant risks, because they’ll inevitably pay off.
Many were weary of watching neighbors and co-workers rake in profits on hot “new-economy” stocks. In some ways, a more daring strategy seemed likely to be safer, in the long run, than holding onto low-risk investments.
But with the Nasdaq composite stock index--the symbol of new-economy investing--down a stunning 34.2% from its peak reached March 10, suddenly the wisdom of such aggressive investing is being debated among small investors.
Whether that represents a sea change, or merely a temporary blip, in Americans’ attitude toward the stock market may go a long way toward determining the course of share prices in the months and even years ahead.
In their purchases of individual stocks and mutual funds, small investors have become a major driving force in the market over the last decade, of course. And in recent years, their willingness to invest aggressively--in already highly valued tech leaders such as Cisco Systems, in fledgling Internet-related companies and in technology-focused mutual funds--has helped provide much of the financing for the new economy.
What’s more, “buying the dips”--jumping into the market whenever prices decline significantly--has been the favorite strategy of many individual investors. And for the most part, it has worked extraordinarily well with tech shares.
That buying will be needed soon, experts say, to provide a critical stabilizing factor in the market.
“If the faith in [buying the dips] is shaken, it could change the entire face of risk taking and investing,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School and author of “Stocks for the Long Run.”
The first big test in the current market slide was the decline that culminated in the Nasdaq index’s 13.6% intraday plunge April 4. Tech shares partially rebounded in the three days that followed, as buyers poured in.
But people who bought that “dip” already face stiff losses.
Now, “it’s the second dip that worries me. Will they [investors] keep the faith?” Siegel asked.
The views investors take of the merits of aggressive investing may depend on when they got into the game.
Investors who took a chance on tech stocks any time before the middle of last year still have sizable, albeit reduced, profits in their stocks.
Indeed, even as risk taking is suddenly vilified, it’s an odd twist of fate that the nerviest small investors--those who jumped into tech and other new-economy stocks when many institutional investors still shied away from them in recent years--are in the best position today.
“The holdouts till the end who just threw in the towel are suffering much more than those who have been playing the game for a long time,” Siegel said. “That is a great irony.”
Those “first-mover” investors may turn more conservative in the near future, but are unlikely to give up entirely on their risk-taking strategies, many experts say.
“Even though we’ve come off a lot, and no one’s happy, we just don’t see the blood in the streets,” said Dick Green, chief executive of Briefing.com, a Web site catering to active individual investors.
“We’re still up 1,000 points on Nasdaq from a year ago, so people are losing profits” rather than their initial investments, he noted.
Consider Steve Kinney.
The 32-year-old Irvine man decided he’d had enough of his slow-growing mutual funds about 2 1/2 years ago, and opted instead to stuff money into technology stocks such as specialty chip maker Broadcom and document-management firm FileNet.
Kinney had “substantial” gains a few weeks ago, and though those have been cut, he’s still sitting on comfortable profits.
“A lot of people have cushions,” he said. “A lot of these players have fabulous gains if they played technology stocks in the last few years, so they’re not losing their kids’ college money or losing their retirement money.”
Many individual investors insist they are not afraid to keep owning, and buying tech stocks.
Jason Sweeney, a 28-year-old full-time investor who lives in Lincoln, Neb., includes among his stock holdings Intel, Dell Computer, data-storage firm EMC and chip maker LSI Logic.
“Ten years from now, are these stocks going to be up or down? I’d almost put my life on them being up, and that’s all I care about,” he said.
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Times staff writer Walter Hamilton can be reached by e-mail at
